The Relationship between the Stock Market and Economic Growth in Kenya

Abstract

A well-functioning stock market has been touted to contribute to the growth of an economy. Economic growth has also been argued to contribute to the performance of the stock markets. The stock market capitalization was evaluated from all the NSE companies while economic growth was measured by real GDP growth rates over the same period. A reliable security market index should consistently reflect the performance of their respective stock markets and therefore provide investors and other policy makers with sufficient information on the overall stock market. There is causal relationship identified to run from economic growth to the stock market returns. This shows that current economic growth trends are a reliable stock market returns indicators in Kenya. No causality was identified between to exist between stock market liquidity and economic growth and as such neither of these two variables led the other. CAPM revealed a weak positive relationship between returns and the stock betas where the NSE market above the risk free rate is negative an inverse relationship between beta and return. There is a positive linear relationship is exhibited between beta and exchange rate.